US debt ceiling stand off an investment opportunity? The best funds to back – though only for the brave

9th October 2013

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The US debt ceiling stand-off has investors holding their breath, but experts have their fingers crossed that a last minute deal will be done, and some expect an equity rally may ensue writes Philip Scott.

The US government is now entering its eighth day of partial shutdown after Congress failed to agree on a new budget.

But a resolution urgently needs to be reached by 17 October, when it will hit its $16.7trn debt ceiling. If the ceiling is not raised, the US could default on its debt payments causing havoc in global markets and the economy.

The past week has seen significant but not dramatic falls, with the US S&P 500 sliding 2% while the FTSE 100 is down by 1% over the seven days.

Despite the deadlock, the International Monetary Fund (IMF) still expects the US to lead global growth but warned that a default “could seriously damage the global economy”. It now expects growth of 1.6% in the US in 2013 and 2.6% next year, albeit the forecasts are down by 0.1% and 0.2% respectively from its previous estimate.

But while the political grandstanding and tension is ratcheting up, investment veterans are expecting a resolution will be reached and the whole situation may be a buying opportunity for intrepid investors.

What the experts are saying

Speaking to CNBC this week, Berkshire Hathaway boss, and the world’s most famous investor, Warren Buffett, told the broadcaster: “We will go right up to the point of extreme idiocy, but we won’t cross it.”

Trevor Greetham, director of asset allocation at fund management group, Fidelity does not expect the fiscal standoff in Washington to have a lasting impact and stock market weakness presents a buying opportunity.

He says: “When the smoke clears we will see a global expansion that is strengthening and broadening with monetary policy set to stay loose in every major economy. An equity-friendly backdrop.”

It is also worth remembering that the raising of the debt ceiling is not a new concept to the US, as JP Morgan Asset Management’s Tony Lanning points out: “Markets appear very complacent to me which seems to imply that investors have concluded its such a big deal that ceiling will have to be raised, maybe this is explained by the fact that the ceiling has been raised before in fact 18 times in the last 20 years.”

For his part Asoka Wöhrmann, co-CIO at DeAWM is confident the opposing parties in the United States will reach an agreement. He adds: “In general, the impact on financial markets and the U.S. economy will be limited.”

In regards to the breaching of the debt ceiling, Mark Dampier, head of research at fund broker Hargreaves Lansdown says: “In reality no one believes this will actually happen.  The market is betting on a last minute deal at five to midnight so at the moment I am sure the volume of shares being traded, particularly in the States, is tiny as I believe the market is expecting a rally once the deal is done.  Conversely of course if no deal is done I think the market fallout could be far more severe.”

The best funds for US investing?

The US, given the overall size of the market, is notoriously difficult for stock-pickers to beat, at least on a consistent basis.

The king of stock-pickers, Buffett himself, has even admitted in the past that index tracking funds, which just slavishly follow the market, will outpace most fund managers over the long term. For investors who perhaps want to take the cheaper route, they could opt for a tracker fund such as HSBC American Index, which mirrors the S&P 500, and with an annual charge of 0.25%, it is certainly one of the cheaper options out there.

The typical US fund has delivered an average return of 45% over the past three years, and while many fund pickers recommend the tracker route, they also believe there are still a number of actively managed funds that deserve attention.

Charles Stanley Direct and Chelsea Financial Services both rate the Axa Framlington American Growth fund, which has investments in the likes of Google and Apple, and the past three years has seen it deliver a 49% return to its investors. The fund focuses on finding companies with an established growth trajectory and its management team aim to spot consistent improvements in company revenue.

Another top pick among some brokers is JPMorgan US Equity Income. The fund, which is up 53% over the past three years, counts consumer brand giant Johnson & Johnson and Wells Fargo among its top holdings.

One of The Share Centre’s tips is Jupiter North American up 47% over three years. The fund concentrates on US blue chip firms and key investments include household names such as Microsoft and Bank of America.

For investors will to take on more risk in the hope of higher returns, it may be worth looking at North American Smaller Companies funds, where the average portfolio has returned 58% in the past three years. These funds look at the far wider US market and are likely to be more volatile than funds that stick to the likes of those listed in the S&P 500. One regularly cited fund is F&C US Smaller Companies, up 59% over three years and by 135% over five years.

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